Accountancy 4 Marks Question

JOURNAL OF ANIRUDH LTD.

Date	Particular	LF	Dr.	Cr.
	P & L Appropriation A/c Debenture Redemption Reserve ( Debenture Redemption Reserve created)		50,000 4,00,000 4,00,000 2,00,000	50,000 4,00,000 4,00,000 2,00,000
	Debenture A/c Debenture holders (Amount of Debentures due)
	Debenture holders Bank A/c (The amount of the debentures paid to the debenture holders)
	Debenture Redemption reserve General reserve (Debenture Redemption reserve transferred to general reserve)

 

1. Provisions for which the related claims are expected to be settled beyond 12 months or operating cycle are classified as long term provisions.

2. Inventories:

Objectives of ‘Financial Statements Analysis’:

1. To Assess the earning capacity or profitability of the firm as a whole as well as its different departments so as to judge the financial health of the firm.
2. To Assess the managerial efficiency by using financial ratios.
3. To Assess the short term and the long term solvency of the enterprise.
4. To Assess their own performance as well as of others through inter firm comparison.
5. To Assess developments in future by forecasting and preparing budgets.
6. To ascertain the relative importance of different components of the financial position of the firm.

Values:

1. Promoting economic friendly ways of supplying energy.
2. Development of rural areas.
3. Infrastructural development in rural areas to increase accessibility.
4. Promoting use of indigenous resources.
5. Providing employment opportunities.

Analysis of Financial Statements is the process of critical evaluation of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm.
Limitations of ‘Financial Statements Analysis’:

1. Historical Analysis as it analyses what has happened till date. It doesn’t reflect the future.
2. Ignores price level changes as a change in price level makes analysis of financial statements of different accounting years invalid.
3. Qualitative aspect ignored as the quality of management, quality of staff etc. Are ignored while carrying out the analysis of financial statements.
4. Suffers from the limitations of financial statements as the analysis is based on the information given in the financial statements.
5. Not free from bias of accountants such as method of inventory valuation, method of depreciation etc.
6. Window dressing to show a better financial position than the actual one by manipulating the books of accounts.

1. Significance to the Finance Manager: Finance Manager can make policies and decisions keeping in mind the liquidity, solvency, efficiency and profitability of the firm.
2. Significance to Trade Payables: Trade payables can check whether the firm is able to pay their debts on time or not.

Values:

1. Promoting environment friendly ways of supplying energy
2. Development of rural areas
3. Infrastructural development in rural areas to increase accessibility
4. Promoting use of indigenous resources
5. Providing employment opportunities

Analysis of Financial Statements is the process of critical evaluation of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm.
Objectives of ‘Financial Statements Analysis’:

1. Assessing the earning capacity or profitability of the firm as a whole as well as its different departments so as to judge the financial health of the firm.
2. Assessing the managerial efficiency by using financial ratios to identify favourable and unfavourable variations in managerial performance.
3. Assessing the short term and the long term solvency of the enterprise to assess the ability of the company to repay principal amount and interest.
4. Assessing the performance of business in comparison to that of others through inter firm comparison.
5. Assessing developments in future by forecasting and preparing budgets.
6. To Ascertain the relative importance of different components of the financial position of the firm.

1. Cash and Cash Equivalents

• Balances with banks
• Cheques, draft on hand
• Cash in Hand
• Current Investments

2. These are the statements which indicate the relationship of different items of a financial statement with some common item as a base by expressing each item as a percentage of the common item.

imitations of ‘Financial Statements Analysis’:

1. It is a historical Analysis as it analyses what has happened till date. It doesn’t reflect the future.
2. It ignores price level changes as a change in price level makes analysis of financial statements of different accounting years invalid.
3. It ignores qualitative aspect as the quality of management, quality of staff etc. are ignored while carrying out the analysis of financial statements.
4. It suffers from the limitations of financial statements as the analysis is based on the information given in the financial statements.
5. It is not free from bias of accountants such as method of inventory valuation, method of depreciation etc.
6. It may lead to window dressing i.e. showing a better financial position than what actually is by manipulating the books of accounts.
7. It may be misleading without the knowledge of the changes in accounting procedure by a firm.

Objectives of ‘Financial Statements Analysis’:

1. Assessing the earning capacity or profitability of the firm as a whole as well as its different departments so as to judge the financial health of the firm.
2. Assessing the managerial efficiency by using financial ratios to identify favourable and unfavourable variations in managerial performance.
3. Assessing the short term and the long term solvency of the enterprise to assess the ability of the company to repay principal amount and interest.
4. Assessing the performance of business in comparison to that of others through inter firm comparison.
5. Assessing developments in future by forecasting and preparing budgets.
6. To Ascertain the relative importance of different components of the financial position of the firm.

1. Objectives of ‘Financial Statements Analysis’:

1. Assessing the earning capacity or profitability of the firm as a whole as well as its different departments so as to judge the financial health of the firm.
2. Assessing the managerial efficiency by using financial ratios.
3. Assessing the short term and the long term solvency of the enterprise.
4. Assessing their own performance as well as of others through inter firm comparison.
5. Assessing developments in future by forecasting and preparing budgets.
6. Ascertain the relative importance of different components of the financial position of the firm.
7. Understanding complicated matter in a simplified manner.

2. Other Current Liabilities:

1. Unpaid Dividend
2. Interest accrued and due on borrowings
3. Interest accrued but not due on borrowings
4. Income received in advance
5. Calls in advance
6. Interest on calls in advance
7. Current maturities of long term debts
8. Application money received for allotment of securities and due for refund and interest due there on.
9. Unpaid matured deposits and interest accrued there on.
10. Unpaid matured debentures and interest accrued thereon.
11. Other payables(outstanding expenses, provident fund payable, ESI payable, CST payable, VAT payable etc.)

Other Current Assets:

1. Prepaid expenses
2. Accrued incomes
3. Advance Taxes
4. Unamortised expenses/losses (to be written off within 12 months from the date of balance sheet).

Limitations of ‘Financial Statements Analysis’:

1. It is a historical Analysis as it analyses what has happened till date. It doesn’t reflect the future.
2. It ignores price level changes as a change in price level makes analysis of financial statements of different accounting years invalid.
3. It ignores qualitative aspect as the quality of management, quality of staff etc. are ignored while carrying out the analysis of financial statements.
4. It suffers from the limitations of financial statements as the analysis is based on the information given in the financial statements.
5. It is not free from bias of accountants such as method of inventory valuation, method of depreciation etc.
6. It may lead to window dressing i.e. showing a better financial position than what actually is by manipulating the books of accounts.
7. It may be misleading without the knowledge of the changes in accounting procedure by a firm.

1. Objectives of ‘Financial Statements Analysis’:

1. Assessing the earning capacity or profitability of the firm as a whole as well as its different departments so as to judge the financial health of the firm.
2. Assessing the managerial efficiency by using financial ratios.
3. Assessing the short term and the long term solvency of the enterprise.
4. Assessing their own performance as well as of others through inter firm comparison.
5. Assessing developments in future by forecasting and preparing budgets.
6. Ascertain the relative importance of different components of the financial position of the firm.
7. Understanding complicated matter in a simplified manner.

2. Other Current Liabilities:

1. Unpaid Dividend
2. Interest accrued and due on borrowings
3. Interest accrued but not due on borrowings
4. Income received in advance
5. Calls in advance
6. Interest on calls in advance
7. Current maturities of long term debts
8. Application money received for allotment of securities and due for refund and interest due there on.
9. Unpaid matured deposits and interest accrued there on.
10. Unpaid matured debentures and interest accrued thereon.
11. Other payables(outstanding expenses, provident fund payable, ESI payable, CST payable, VAT payable etc.)

Other Current Assets:

1. Prepaid expenses
2. Accrued incomes
3. Advance Taxes
4. Unamortised expenses/losses (to be written off within 12 months from the date of balance sheet).

Comparative Income Statement
For the years ended on 31.12.06 & 31.12.07

Objectives of ‘Financial Statements Analysis’:

1. To provide information about economic resources and obligations of a business: They are prepared to provide adequate, reliable and periodical information about economic resources and obligations of a business firm to investors and other external parties who have limited authority, ability or resources to obtain information.
2. To provide information about the earning capacity of the business: They are to provide useful financial information which can gainfully be utilised to predict, compare, and evaluate the business firm’s earning capacity.
3. To provide information about cash flows: They are to provide information useful to investors and creditors for predicting, comparing and evaluating, potential cash flows in terms of amount, timing and related uncertainties.
4. To judge effectiveness of management: They supply information useful for judging management’s ability to utilise the resources of a business effectively.
5. Information about activities of business affecting the society: They have to report the activities of the business organisation affecting the society, which can be determined and described or measured and which are important in its social environment.
6. Disclosing accounting policies: These reports have to provide the significant policies, concepts followed in the process of accounting and changes taken up in them during the year to understand these statements in a better way.

	Item	Head	Sub-Head
(i)	Prepaid Insurance	Current Assets	Other Current Assets
(ii)	Investment in Debentures	Non Current Assets	Non Current Investments
(iii)	Calls-in-arrears	Shareholders’ Funds	Share Capital/ Subscribed Capital
(iv)	Unpaid dividend	Current Liabilities	Other Current Liabilities
(v)	Capital Reserve	Shareholders’ Funds	Reserves and Surplus
(vi)	Loose Tools	Current Assets	Inventories
(vii)	Capital work-inprogress	Non Current Assets	Fixed Assets
(viii)	Patents being developed by the company	Non Current Assets	Fixed Assets- Intangible Assets under development

Financial Analysis has great importance to various accounting users on various matters. Income Statements, Balance Sheets and other financial data provide information about expenses and sources of income, profit or loss and also helps in assessing the financial position of a business. These financial data are not useful until they are analysed. There are various tools and methods such as Ratio Analysis, Cash Flow Statements that make the financial data to cater varying needs of various accounting users.
The following are the reasons that advocate in favour of Financial Analysis:

1. It helps in evaluating the profit earning capacity and financial feasibility of a business.
2. It helps in assessing the long-term solvency of the business.
3. It helps in evaluating the relative financial status of a firm in comparison to other competitive firms.
4. It assists management in decision making process, drafting various plans and also in establishing an effective controlling system.

The various techniques used in financial analysis are as follows:

1. Comparative Statements: These statements depict the figures of two or more accounting years simultaneously that help to access the profitability and financial position of a business. The Comparative Statements help us in analysing the trend of the financial position of the business. These statements also enable us to undertake various types of comparisons like inter-firm comparisons and intra-firm comparisons. It presents the change in the financial items both in absolute as well as percentage terms. Therefore, these statements help in measuring the efficiency of the business in relative terms. The analyses based on these statements are known as Horizontal Analysis.
2. Common Size Statements: These statements depict the relationship between various items of financial statements and some common items (like Net Sales and the Total of Balance Sheet) in percentage terms. In other words, various items of Trading and Profit and Loss Account such as Cost of Goods Sold, Non-Operating Incomes and Expenses are expressed in terms of percentage of Net Sales. On the other hand, different items of Balance Sheet such as Fixed Assets, Current Assets, Share Capital, etc. are expressed in terms of percentage of Total of Balance Sheet. These percentage figures are easily comparable with that of the previous years’ (i.e. inter-firm comparison) and with that of the figures of other firms in the same industry (i.e. inter-firm comparison) as well. The analyses based on these statements are commonly known as Vertical Analysis.
3. Trend Analysis: This analysis undertakes the study of trend in the financial positions and the operating performance of a business over a series of successive years. In this technique, a particular year is assumed to be the base year and the figures of all other years are expressed in percentage terms of the base year’s figures. These trends (or the percentage figures) not only helps in assessing the operational efficiency and the financial position of the business but also helps in detecting the problems and inefficiencies.
4. Ratio Analysis: This technique depicts the relationship between various items of Balance Sheet and the Income Statements. It helps in ascertaining the profitability, operational efficiency, solvency, etc of a firm. The analysis expresses financial items in terms of percentage, fraction, proportion and as number of times. It enables budgetary controls by assessing the qualitative relationship among different financial variables. This analysis provides vital information to different accounting users regarding the financial position, viability and performance of a firm. It also facilitates decision making and policy designing process.
5. Cash Flow Analysis: This analysis is presented in the form of a statement showing inflows and outflows of cash and cash equivalents from operating, investing and financing activities of a company during a particular period of time. It helps in analysing the reasons of receipts and payments in cash and change in the cash balances during an accounting year in a company.

Limitations of Financial Analysis:

1. Ignores Changes in the Price level: The financial analysis fails to capture the change in price level. The figures of different years are taken on nominal values and not in real terms (i.e. not taking price change into considerations).
2. Misleading and Wrong Information: The financial analysis fails to reveal the change in the accounting procedures and practices. Consequently they may provide wrong and misleading information.
3. Interim and Final Picture: The financial analysis presents only the interim report and thereby provides incomplete information. They fail to provide the final and holistic picture.
4. Ignores Qualitative and Non-monetary Aspects: The financial analysis reveals only the monetary aspects. In other words, these analyses consider only that information that can be expressed only in monetary terms. These analyses fail to disclose managerial efficiency, growth prospects, and other non-operational efficiency of a business.
5. Accounting Concepts and Conventions: The financial analysis are based an accounting concepts and conventions. Therefore, the analysis and conclusions based on such analyses may not be reliable. For example, the analysis considers only the book-value of various items (i.e. according to the Going Concept) and consequently ignores the present market value of those items. Hence, the analysis may not be realistic.
6. Involves Personal Biasness: The financial analysis reflects the personal biasness and personal value judgments of the accountants and clerks involved. There are different techniques used by different personnel for charging depreciation (original cost or written-down value method) and also for inventory valuation. The use of different techniques by different people reduces the effectiveness of the financial analysis.
7. Unsuitable for Comparisons: Due to the involvement of personal value judgment, personal biasness and use of different techniques by different accountant, various types of comparisons such as inter-firm and intra-firm comparisons may not be possible and reliable.

Statement of Profit and Loss shows the net profit or net loss of that year. A comparative statement of profit and loss shows the net profits for a number of years so that changes in absolute data in terms of money as well as in terms of percentages may be known. Comparative statement of profit and loss provides the following informations:The form of comparative statement of profit and loss also consists of five columns.In the first column items of Statement of Profit & Loss are shown. In the second column the data for previous year is shown and in the third column the data for current year is shown, In the fourth column the increase or decrease in absolute data is shown in terms of rupee amounts. Fifth column shows the increase or decrease in various items in the form of percentages.

"Financial statement analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements and a study of the trends of these factors as shown in a series of statements."
Investors and shareholders of the business are interested in the longevity of the business enterprise and therefore, they want to know the earning capacity of the business and its prospects for future growth and prosperity. Analysis of financial statements of a company helps them a great deal in assessing the capacity of the business to pay dividend at a higher rate and also the safety of their investments.

Affected by Window - dressing: Some firms resort to window-dressing their financial statements to cover up bad financial position on the eve of accounting date.
For example, they may not record the purchases made at the end of the year or they may overvalue their closing stock. In such cases, the results obtained by analysis of financial statements will be misleadingEffect uf Personal Ability and Bias of the Analyst: Figures given in financial statements do not speak by themselves, hence, any conclusion can be drawn from these figures. Conclusions obtained from the analysis of these figures are affected to a great extent by the personal ability and knowledge of the analyst. for example, for calculating 'return on capital' one analyst may consider the profits after taxes, whereas, the other analyst may consider the profits before taxes. Similarly; the term
'Capital' may mean only the 'Shareholder's Funds' for one analyst, whereas the other analyst may take the 'Shareholder's Funds and Long Tenn Debts' as capital.

Comments

1. Inspite of decrease in current assets and current liabilities, the current ratio has improved.
2. Decrease in cash and bank balance indicates that there will be delay in payments.
3. Increase in fixed assets and share capital shows that assets are purchased with long term sources of finance.

Effects of Revised Schedule VI on Tools of Analysis of Financial Statements As per revised Schedule VI part II the Format of Profit of Loss Statement is as follows.

Comment: Company has reduced its cost and expenses which has resulted in increase in income from operations and net profit.

The following are the importance of Comparative Statements.

1. Simple Presentation: The Comparative Statements present the financial data in a simpler form. Moreover, the year-wise data of the same items are presented side-by-side, which not only makes the presentation clear but also enables easy comparisons (both intra-firm and inter-firm) conclusive.
2. Easy for Drawing Conclusion: The presentation of comparative statement is so effective that it enables the analyst to draw conclusion quickly and easily and that too without any ambiguity.
3. Easy to Forecast: The comparative analysis of profitability and operational efficiency of a business over a period of time helps in analysing the trend and also assists the management to forecast and draft various future plans and policy measures accordingly.
4. Easy Detection of Problems: By comparing the financial data of two or more years, the financial management can easily detect the problems. While comparing the data, some items may have increased while others have decreased or remained constant. The comparative analysis not only enables the management in locating the problems but also helps them to put various budgetary controls and corrective measures to check whether the current performance is aligned with that of the planned targets.